Cheap money is money borrowed at a low interest rate, or a setting of low interest rates by a central bank such as the Federal Reserve to help buoy a struggling economy. If you get a bank loan or credit cards with a low interest rate, for example, you’re probably taking advantage of cheap money.
Understanding how cheap money works can help you determine when it might be an optimal time to borrow money, and how low interest rates impact the U.S. economy.
Definition and Examples of Cheap Money
“Cheap money” is so named because it’s inexpensive to borrow. In other words, when money is cheap, it enables consumers and businesses to access credit, typically at very low interest rates. As a borrower, lower interest rates save you money because you end up spending less over the life of the loan. “Any time the rate is between 1% and 4%, it’s pretty cheap,” said Kevin L. Matthews II, a money expert and author of “Starting Point: How To Create Wealth That Lasts.”
Although cheap money is good for borrowers, it’s often detrimental to savers and investors. Low interest rates often mean lower returns on certain instruments, such as savings accounts, money market funds, certificates of deposit (CDs), and bonds.
Examples of cheap money include:
- A car loan at 1.9% interest
- A credit card offering a 0% introductory APR for 18 months
- A 30-year fixed mortgage at 2.935%
How Cheap Money Works
Cheap money often becomes available when the Federal Reserve lowers interest rates, which it typically does to stimulate the economy. Lower interest rates encourage consumers to seek loans to buy big-ticket items, such as cars and homes. It also prompts businesses to borrow money to expand factories, buy heavy equipment and hire staff—all of which have a positive impact on economic growth.
“If interest rates are low and I buy a house, it’s good for the economy,” Matthews said. Cheap money makes it so “people can buy stuff and take advantage of the low interest rates,” he adds.
The downside of cheap money is that it puts additional money into circulation. That drives prices up, which creates inflation. The higher prices go, the higher the accompanying inflation. When the economy is booming, the Federal Reserve will often raise interest rates to slow the rate of inflation.
Cheap money can negatively impact the economy if borrowers take on too much debt and aren’t able to pay it back.
When rates are low, however, car loans and mortgages are considered cheap money. For instance, refinancing your current mortgage at a lower interest rate would be a simple way to take advantage of cheap money.
In addition, if you get a credit card that offers a 0% introductory interest rate for the first 12 months, that’s also a form of cheap money. However, keep in mind that after the low introductory rate expires, credit card companies often hike interest rates substantially. Some issuers may charge as much as 25% or more, depending on your payment and credit history. That’s when cheap money becomes what’s considered “expensive money,” which is loaned at much higher interest rates.
While cheap money is generally good for borrowers, it isn’t so beneficial to savers because it reduces interest rates on savings accounts, including high-yield savings accounts (HYSA), where you might keep an emergency fund, for example.
"As most of us saw when rates were cut, if you’re putting money in a savings account, and you used to earn 2% or 3% interest, and suddenly interest is less than 1%, you’re forced to do something else with your money because the interest rate you’re getting is not keeping up with inflation,” Matthews said.
- Cheap money refers to loans and lines of credit with low interest rates.
- Cheap money is useful for consumers seeking to save money by borrowing at lower interest rates.
- Cheap money affects savers negatively because it reduces savings account interest rates.